Getting Pre-Approved is the Right Way to House Hunt
Information provided by interest.com
For house hunters, being "pre-qualified" for a mortgage may sound good, but getting "pre-approved" is far more impressive. It's like the difference between an actor telling someone he's auditioned for a role in a play and telling him or her he actually landed the part.
"Getting pre-qualified doesn't really mean much," explains Tom Cox, a real estate agent with Watson Realty in Bakersfield, California. "Some real estate agents will not even deal with people who haven't been pre-approved for a loan. This is especially true in hot real estate markets." If the clients are only pre-qualified, there is no guarantee they can actually get a loan to buy the home they want. If they can't get a loan, everyone involved in the process has wasted their time: the buyer and the buyer's real estate agent who have been looking for the right house, and the seller and seller's agent who have been waiting for a solid offer.
To get pre-qualified, all you have to do is give a mortgage loan officer the information required for getting a loan: where you work, how much you make, other sources of income, expenses, credit history, debt, and so on. The lender simply takes your word and uses your information to give you an estimate of what you probably could afford. There is no formal credit check involved, and the agent has no way to verify the data are correct.
To get pre-approved, however, the lender checks to make sure that all the information you offer is actually true: running a credit check and doing all the other work normally involved in approving a loan. Thus, the real estate agent and the person selling the house know the buyer actually will have access to enough money to buy the house because a loan for "X" amount of money already has been approved. But getting pre-approved for a loan does more than tell the real estate agent how much you can borrow. It also gives you a reality check.
Do you really know exactly how much money you could borrow? Very few people do. Getting pre-approved will tell you what your borrowing limit is, and even how much you'd have to pay every month if you borrowed as much as you could. Once you know that upper limit, you are free to decide how much you really want to borrow. Just because you can afford to borrow $350,000 doesn't mean that you must -- or should. Once you decide what size payment you can make, you can tell your real estate agent how much you are willing to borrow. This amount, plus your down payment, will set the upper price limit for the houses you'll want to view.
"A lot of people will say money is no object," Cox says, "but it is. It always is. I know that I don't want to show people houses that they will fall in love with only to find that the homes are out of their price range. After that, when they see the homes they can afford, they might feel they are settling for second best." It's not just the broker who likes pre-approved clients, but sellers as well. "I know that if I was selling my own home and I had two offers, and one was pre-approved and the other wasn't, I would probably go with the one that was pre-approved." Cox says that even though more people are becoming aware of the benefits of getting pre-approved, only about 10 percent of his customers currently come to him that way; however, many of them will start the pre-approval process while they are actually house hunting.
Once you have found the home that you like and worked out your deal with the seller, all you have to do is get the home appraised to make sure it is actually worth what you are paying for it. That, obviously, is the one part of the process that cannot be done before you start house hunting. There are two other points
to remember. One is, the amount of time that lapses between getting pre-approved and actually finding the home you want to buy, and the second is what you do during that time that might affect your credit."Once you have found the house, the lender will ask for the appraisal," Cox explains. "Depending upon how long it's been since you were pre-approved, the lender might also do another credit check on you to make sure that your credit rating and job status haven't changed." After all, people do lose their jobs and get divorced, both of which would have a major impact on your credit score and your ability to make house payments. Depending upon the lender, your credit history, and how long it has been between getting approved and the actual closing there might be yet "another credit check prior to the close of escrow…just to make sure."
Cox says he advises his pre-approved clients not to make any major purchases or other financial decisions between getting pre-approved and actually getting their home and home loan. That means no new cars, big screen TVs, RVs, cabins, major trips, or anything else that could change your credit report, debt load, or debt-to-income ratio. When you are shopping for a house, focus on the house. Don't start shopping for anything else. If you want to start thinking about what you want to buy for the new house, do so, but don't buy it until the house is actually yours. After all, when you are looking for a house the only thing you must get for it is a mortgage, and that should be pre-approved when you begin your house hunt.
